Entrepreneurship, knowledge and employment

Ricardo and the two gains from trade: the limitation of the theory of comparative advantage

Gaul Michael, University Paris I Panthéon-Sorbonne

In the "Essay" and the "Principles", Ricardo distinguished two gains from trade: a static gain consisting in an increase of the mass of commodities and a dynamic gain consisting in an increase of the profit rate. The additional element introduced in the "Principles" and not to be found in the "Essay" is a specification of the conditions for the realisation of the static gain, stating the irrelevance of absolute advantages. The question left open by Ricardo and usually neglected by commentators is whether the conditions for the realisation of the static gain are identical with the ones for the realisation of the dynamic gain. Addressing it requires a formalisation incorporating input trade. On this basis, Ricardo's general insight into the existence of two gains can be confirmed. However, the conditions for the realisation of the static gain are shown not to be identical with the conditions for the realisation of the dynamic gain.

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Keywords: Ricardo, J. St. Mill, gains from trade, input trade, comparative advantage

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